Building society bosses reacted angrily after the City regulator signalled that it was preparing dramatic changes to the way the societies can raise fresh funds to bolster their capital cushions.

As the societies are owned by their members and do not have shareholders, they are unable to issue new shares in the way banks can to strengthen their crucial regulatory capital ratios.

Instead, the biggest societies have issued special shares known as permanent interest bearing shares (Pibs) that are listed on the stock market and pay a fixed rate of interest. They have traditionally counted as hybrid capital that is used to support banks and building societies as tier one capital.

In a paper published the FSA indicated it would no longer be prepared to treat Pibs as tier one capital, leaving the mutual sector with the prospect of having to devise other ways to raise capital.

The consultation paper also looks at the extra capital banks will need to find to support their trading activities – which could be as much as £29bn – and will prevent banks from concentrating their exposure to a single lender and also require banks to hold shares – or "keep their skin in the game" – of any new issues they handle.

The FSA is changing its approach to hybrid capital because it believes the capital should be able to absorb losses and be converted into equity when the going gets tough. It also has implications for the banking sector.

Adrian Coles, director-general of the Building Societies Association, said: "This is an important issue for mutuals in the UK and if the FSA does not change its mind there could be significant difficulties."

He said the BSA had submitted an opinion by City law firm Allen & Overy arguing that Pibs should still be allowed to be treated as tier one capital but was awaiting a detailed response. The FSA said: "We are committed to the mutual sector. Depositors need to be as protected as those at a proprietary bank."

The suggested changes also have implications for how banks can use hybrid capital. They will be required to issue instruments that look like the contingent convertible securities being used by Lloyds Banking Group as part of its efforts to raise £21bn to exit from the government's asset protection scheme. Lloyds is also conducting a cash call on shareholders that will close this week and require the taxpayer to buy another £5bn of the bank's shares.